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February 11, 2014

7 Steps to Successfully Manage Tangible Assets

Recent record-setting auction house sales prices—$83 million for the Pink Star diamond and $142 million for Francis Bacon's "Three Studies of Lucien Freud"—have returned attention to valuable collections as a potentially rewarding asset class. In recent years, these tangible assets, such as fine art, wine, jewelry, antiques, sports memorabilia and classic cars have finally been recognized as an asset class in their own right.

Yet high-net-worth individuals rarely apply to these items the same rigor they have when making financial investments or business decisions. Homeowners can only sufficiently protect their wealth and understand the financial options available to them if they and their wealth advisors have access to a comprehensive view of their tangible assets.

Here are seven steps that wealth advisors can help their clients take to manage the complex and evolving set of risks associated with this increasingly important asset class.

Step 1: Assemble the Right Team of Experts

To most effectively manage the risks involved with investing in tangible assets, families and their wealth advisors should select a qualified team of experts to assist with documenting, valuing, insuring and protecting their prized possessions. First, the team should include an independent insurance agent or broker who specializes in serving HNW clients. To identify these agents, check to see that they have a well-defined process for assessing personal risks and have access to carriers that also specialize in serving HNW clients. Other experts to engage include a loss prevention specialist, estate and tax planners, a CPA and an attorney.

Step 2: Secure an Accurate Appraisal

The appraisal is the foundation for almost every decision made with tangible assets. Picking the right expert is essential. Appraisal industry associations, such as the American Society of Appraisers, can provide guidance in this regard for insurance purposes. The IRS provides and requires additional rules for appraisers and appraisal reports for income, gift and estate tax purposes.

For especially valuable items, consider two or three appraisals by different appraisers at the same time to guarantee your assets are valued accurately.

Step 3: Track New Transactions at the Point of Sale; Monitor Price Changes

Consider cloud-based software to help manage the records of your assets. These systems should store important details about each item along with its value, proof of authenticity and a schedule to update valuation. The most robust solutions will be able to accept information about transactions at the point of sale, eliminating the tedium of manually entering new items. They will also be able to automatically adjust valuations, or notify the owner about the need for an updated appraisal, as related sales occur at retail and auction houses.

Step 4: Schedule Highly Valuable Items on Valuables Policy

Proper insurance coverage represents a critical component of any wealth protection plan. Yet a 2011 ACE study found that nearly 40% of wealthy collectors did not have all of their precious items insured with a valuables policy.

For the best protection, families should seek the added protection of a valuables policy, which allows the family to declare the value of each piece, or group of pieces, on the policy. This coverage is not restricted by specific coverage limits for certain items in homeowners policies, and it applies to a broad array of risks, including those excluded by homeowners policies, such as flood.

The best policies will also guard against price fluctuations by providing coverage for the market value of an item at the time just prior to loss up to 50% more than the value listed on the policy.

Step 5: Engage the Services of a Risk Consultant

Wealthy families often fail to work with a professional risk consultant, leaving themselves and their assets exposed to serious risks. Even if a property is adequately insured, virtually all owners would prefer to prevent loss in the first place over having to make a claim.

A risk consultant can recommend and help owners implement key loss prevention strategies, including an updated inventory of property, evacuation planning for precious collections as well as family members, background screening of domestic staff and contractors to help prevent theft, and backup power supplies for environmental controls and security systems.

Step 6: Determine a Succession Plan

Too many families wait to develop a strategy for their valuables until it is too late to make a rational decision about a succession plan. It is never too early to begin planning and discuss the various methods with your key advisors.

If you’re planning on leaving your assets in a will or trust, donating pieces to a museum or writing an estate planning letter, you will need professionals who have experience dealing with these assets and their unique tax and financial opportunities and consequences. Proper documentation enables proper planning and ensures that the proper tax basis is reflected, which can save family members thousands of dollars.

Step 7: Regularly Discuss Your Tangible Assets With Your Advisors

In every wealth planning consultation, devote sufficient time to discuss the tangible assets in your portfolio. Families may not consider themselves to be collectors, but anyone who owns jewelry, watches, memorabilia, antique furniture or other luxury items must ensure those valuable items are properly accounted for.

Unless advisors are kept up to date about your tangible assets, they will be unable to help you minimize risk or capitalize on opportunities, such as being able to secure a loan on favorable terms by using the assets as collateral.

Today’s investors have the opportunity to reap significant benefits by investing in tangible assets, but these investments pose unique challenges. The challenges include: determining value and authenticity, documentation, estate and tax planning as well as insurance. Owners of tangible assets should embrace the new technology tools that dramatically improve the management of their tangible wealth. By regularly discussing these critical issues with clients, wealth advisors will be uniquely positioned to deliver a comprehensive picture of wealth.